Felix & Co. Accountants

Even with the best payroll software, mistakes happen — a wrong tax code, a miscalculated overtime payment, an employee accidentally paid twice, or figures reported incorrectly to HMRC through Real Time Information. The good news is that HMRC has a well-established process for correcting payroll errors, and how you fix it depends mainly on when the mistake is discovered and whether it affected the employee’s pay, the figures reported to HMRC, or both.

Step 1: Identify Exactly What Went Wrong

Before correcting anything, pin down the specific nature of the error:

• Pay or deduction error: the employee was paid the wrong gross amount, or Income Tax/National Insurance was calculated incorrectly
• Reporting error: the employee was paid correctly, but the Full Payment Submission (FPS) sent to HMRC contained the wrong figures
• Payment date error: the wrong payment date was recorded, misaligned the payment with the incorrect tax period
• Employee information error: incorrect start or leaving dates, National Insurance category, or personal details

Compare the current period’s figures against year-to-date totals in your payroll software or submission log to confirm exactly where the discrepancy lies before making any correction.

Correcting the Figures Reported to HMRC

You cannot “reverse out” an FPS once it’s been submitted — instead, corrections are made by reporting the correct year-to-date figures going forward:

• If discovered within the same tax year: simply include the corrected year-to-date figures in your next regular FPS. There’s no need to resubmit each individual period separately; the correction flows through as an adjustment to the running total.
• If discovered shortly after the tax year ends (broadly, up to 19 April): you can generally still submit an additional FPS with corrected year-to-date figures as at 5 April for the previous tax year.
• If discovered later, after the final submission deadline has passed: a correction for an earlier tax year is generally still possible, but the process depends on your payroll software and how far back the correction relates — this is worth checking with your payroll provider or accountant, since the mechanism has changed in recent years and older correction methods (such as the Earlier Year Update) are being phased out for more recent tax years.

Correcting a payment date specifically follows a slightly different approach — an additional FPS with the correct payment date, marked with the appropriate late reporting reason, is generally the right route.

Will You Be Penalised for a Payroll Error?

Not automatically. HMRC has confirmed that a penalty only applies where the employer failed to take reasonable care or acted deliberately — a genuine, promptly corrected mistake generally doesn’t attract a penalty on its own. This is a similar principle to the behaviour-based penalty framework used elsewhere in the tax system, and it’s another reason to correct errors as soon as they’re identified rather than leaving them unaddressed.

If You Underpaid an Employee

Once the correct figures are established, the shortfall generally needs to be paid to the employee as soon as practicable, alongside the corrected PAYE reporting. Underpaying employees, even accidentally, can create separate employment law issues if it results in pay falling below the National Minimum or Living Wage for the hours worked, so it’s worth checking this specifically where an underpayment has occurred, not just correcting the PAYE figures.

If You Overpaid an Employee

Recovering an over-payment from an employee is more sensitive than it might first appear. While employers generally have the right to recover a genuine over-payment, doing so requires careful handling:

• Communicate clearly and promptly with the employee about the error and the proposed recovery
• Have a documented policy, or agree a reasonable repayment arrangement, particularly for larger amounts, rather than deducting the full sum from a single payslip without warning
• Be cautious about reducing a single deduction to the point where it takes pay below the National Minimum Wage for that pay period
• Keep clear records of the error, the amount, and how it was recovered, in case questions arise later

Unilaterally deducting a large over-payment without any communication can create genuine employment relations problems, even where the employer is technically entitled to recover the money.

Correcting Employer Payments to HMRC

A common misconception is that correcting an earlier period’s FPS changes what was owed to HMRC for that earlier period. In practice, corrections to previously reported figures typically adjust the payment due for the period in which the correction itself is submitted, not the original period — so if you correct a Month 3 error in Month 6, the adjustment generally shows up in your Month 6 liability to HMRC, rather than reopening the Month 3 payment.

What If HMRC’s Records Still Show the Wrong Figures?

If you’ve checked that the correct information was submitted via your RTI returns but HMRC’s own systems still show something different, this points to an error on HMRC’s end rather than in your submissions. In this situation, you can use HMRC’s dedicated service to query and correct an employer PAYE bill discrepancy, rather than resubmitting figures you’ve already confirmed are correct.

Preventing Payroll Errors Going Forward

A few habits significantly reduce the risk of recurring payroll errors:

• Reconciling payroll reports against bank payments each pay period, not just at year end
• Double-checking tax codes when HMRC issues updated notices, rather than assuming they’re correct
• Using payroll software that clearly flags year-to-date discrepancies before submission
• Reviewing new employee starter information carefully, since incorrect starter declarations are a common source of tax code errors

See our guide on small business payroll explained for a broader introduction to running payroll correctly from the outset.

How Felix Accountants Can Help

We help small employers correct payroll errors quickly and properly, handle the sensitive process of recovering over-payments from employees, and set up ongoing payroll processes that reduce the chance of errors recurring. Our payroll services can also take this off your hands entirely, running your payroll and managing HMRC reporting on your behalf.

Frequently Asked Questions

Can I fix a payroll error from an earlier pay period myself?

Yes, in most cases you correct it by including the updated year-to-date figures in your next regular FPS, rather than resubmitting the earlier period separately.

Will HMRC fine me for a genuine payroll mistake?

Not automatically. Penalties generally only apply where reasonable care wasn’t taken or the error was deliberate — a promptly corrected genuine mistake usually doesn’t attract a penalty.

Can I deduct an over-payment from an employee’s next payslip without telling them?

It’s strongly advisable not to. While employers generally have the right to recover a genuine over-payment, doing so without clear communication can create employment relations issues, and deductions shouldn’t reduce pay below the National Minimum Wage for that period.

Does correcting an old payroll error reopen what I owed HMRC for that earlier period?

Generally no. Corrections to earlier periods typically adjust the payment due for the period in which the correction is submitted, rather than reopening the original month or quarter’s liability.

What should I do if HMRC’s records don’t match what I submitted?

If you’ve confirmed the correct figures were submitted via RTI, this usually indicates an error on HMRC’s end, and you can use HMRC’s dedicated service to query and resolve the discrepancy.

There isn’t just one deadline for correcting a Self Assessment error — there are several, and which one applies depends on how the correction affects your tax bill, how long ago the return was filed, and whether HMRC has already noticed the issue themselves. Understanding these different time limits helps you work out exactly where you stand, and how urgently you need to act.

The Standard Amendment Window: 12 Months

For most straightforward corrections, you have 12 months from the original filing deadline to amend your return, whether online or on paper. For example, a 2024/25 return with a filing deadline of 31 January 2026 can be amended up until 31 January 2027. Within this window, corrections are relatively simple — log in to your HMRC online account (after a required 72-hour wait following the original submission), update the figures, and resubmit.

After 12 Months, But Within Four Years: Over-payment Relief

If you’ve missed the standard 12-month amendment window and the correction would mean you’d overpaid tax, you can make a formal claim for “over-payment relief.” This must generally be submitted within four years from the end of the tax year the return relates to, and requires a written claim to HMRC rather than a simple online amendment — including the tax year involved, the reason for the correction, the amount overpaid, and a signed declaration.

Underpayments Outside the 12-Month Window

If the correction means you owe more tax, rather than less, there isn’t a similarly generous window — you should notify HMRC as soon as you become aware of the error, regardless of how long ago the original return was filed. Voluntarily correcting an underpayment, even years later, is still treated far more favourably than waiting for HMRC to discover it independently, since it keeps the disclosure classed as unprompted for penalty purposes.

How Long Does HMRC Have to Challenge Your Return?

It’s worth understanding the position from HMRC’s side too, since it affects how long a genuine error could remain “live.” HMRC’s general time limits for opening a “discovery assessment” — essentially, going back and adjusting a previous year’s tax — depend on the reason for the inaccuracy:

• 4 years from the end of the relevant tax year, for genuine mistakes made despite taking reasonable care
• 6 years from the end of the relevant tax year, where the taxpayer failed to take reasonable care (a careless error)
• 20 years from the end of the relevant tax year, where the error was deliberate

Our guide on HMRC’s tax look-back periods covers this framework in more detail, and it’s the same underlying structure used to determine how many years landlords need to cover in a Let Property Campaign disclosure.

Why Acting Quickly Still Matters, Even Within a Longer Window

Even where you’re technically still within a four-year or longer window to correct something, waiting has real costs. Interest accrues on any underpaid tax from the original due date, regardless of when you get around to correcting it, so delaying simply increases the amount ultimately owed. There’s also a meaningful difference in how penalties are calculated between a genuinely prompt, voluntary correction and one that drags on for years before being addressed — our guide on prompted versus unprompted disclosures explains this distinction, and the same underlying principle applies to routine error correction, not just formal disclosure campaigns.

A Practical Summary of the Time Limits

What Happens If You Miss the Self Assessment Filing Deadline Entirely?

It’s worth distinguishing between correcting an error on a filed return and simply filing late in the first place. Missing the original Self Assessment deadline triggers its own automatic penalties, starting immediately after the deadline and increasing the longer the return remains outstanding. Our guide on HMRC’s penalties for missing the tax deadline covers this separate scenario, and our wider guide to key UK tax year dates and deadlines maps out the full annual calendar.

Special Cases: Multiple Years and Ongoing Income Sources

Where an error relates to an income source that’s been consistently under-reported across several years — such as rental income — each year technically has its own time limits, but it’s usually more practical to address them together through a structured process, rather than a series of separate corrections. This is exactly the situation the Let Property Campaign is designed for when the underlying issue is rental income specifically.

How Felix Accountants Can Help

We help clients work out exactly which correction route and time limit applies to their specific situation, whether that’s a straightforward in-year amendment, a formal over-payment relief claim, or a multi-year rental income disclosure. Our guide on HMRC compliance covers the wider penalty and behaviour framework that underpins all of this.

Frequently Asked Questions

What’s the deadline to amend a Self Assessment return online?

12 months from the original filing deadline. For example, a return with a 31 January 2026 deadline can be amended online until 31 January 2027.

Can I still get a refund if I missed the 12-month amendment window?

Yes, generally through a formal over-payment relief claim, which must be submitted within four years from the end of the relevant tax year.

Is there a deadline for telling HMRC I underpaid tax?

Not a fixed one in the same way — you should notify HMRC as soon as you become aware of an underpayment, regardless of how long ago the original return was filed, to keep the correction classed as voluntary.

How far back can HMRC go if they discover an error themselves?

Generally 4 years for a genuine mistake, 6 years for a careless error, and up to 20 years where the inaccuracy was deliberate.

Does correcting an old error always trigger a penalty?

Not necessarily. Genuine, voluntary corrections made with reasonable care are often treated leniently, and penalties depend heavily on the underlying behaviour rather than simply how long ago the error occurred.

Renovation work is where a lot of Let Property Campaign disclosures get genuinely complicated. Unlike straightforward running costs such as insurance or letting agent fees, renovation spending often sits in a grey area between “repair” (generally an allowable expense against rental income) and “capital improvement” (treated very differently for tax purposes). Getting this distinction right — and having the records to support it — makes a real difference to your disclosure.

Repairs vs Capital Improvements: The Core Distinction

This is the single most important distinction to understand before including renovation costs in a Let Property Campaign disclosure:

• Repairs and maintenance restore the property to its previous condition, or replace something on a “like for like” basis. Examples include fixing a broken boiler, repairing a leaking roof, or replacing a worn carpet with a similar one. These are generally deductible against rental income in the year the cost is incurred.
• Capital improvements go beyond restoring the property and instead enhance it, extend it, or add something that wasn’t there before — a loft conversion, an extension, or converting a single dwelling into two flats, for example. These aren’t deductible against rental income; instead, they’re generally added to the property’s cost base and only become relevant when calculating Capital Gains Tax on an eventual sale.

Why This Distinction Gets Genuinely Tricky

Many renovation projects mix both categories in a single job. Replacing a dated kitchen with a similar, modern equivalent is generally a repair; replacing that same kitchen while also knocking through a wall to create an open-plan layout introduces a capital element into the same project. Similarly, replacing single-glazed windows with double glazing has historically been accepted by HMRC as a repair, on the basis that double glazing is now the modern equivalent of a like-for-like replacement, even though it’s technically an improvement in performance.

This is exactly the kind of judgement call where professional advice earns its keep — getting the split wrong in either direction either understates a genuine deduction or overstates one, and both create problems in a disclosure.

What About a Property Bought in Poor Condition?

A particularly important rule to be aware of: if a property was purchased in a state of disrepair and renovation work was needed before it could be let at all, HMRC generally treats those costs as capital rather than revenue, even if the individual repairs would otherwise look like straightforward like-for-like work. This is because the cost of bringing a run-down property up to a let-table standard is seen as part of the acquisition cost, not an ongoing running expense of an already-established rental business. If your disclosure involves a property that needed significant work before its first tenancy began, this rule needs particular care.

Capital Allowances: A Separate Consideration

Certain capital expenditure — particularly on furniture, fixtures and equipment in furnished lettings, or on qualifying items in some commercial-adjacent scenarios — may separately qualify for capital allowances, which provide tax relief in a different way from either a straightforward repair deduction or Capital Gains Tax treatment. Our guide on maximising capital allowances for a property investor covers this in more detail, and it’s worth reviewing alongside any wider renovation spending.

What Records You’ll Need

Because the repair-versus-capital distinction depends heavily on the specific nature of the work, the quality of your records matters more here than almost anywhere else in a disclosure. Ideally, you’d retain:

• Itemised invoices from contractors, breaking down the work done rather than a single lump-sum figure
• Before-and-after photographs, which can help demonstrate whether work was genuinely like-for-like or represented a real change to the property
• Planning permission or building control records, where relevant, which often clearly indicate whether work went beyond a simple repair
• Dates of the work relative to the start of the letting, since per-letting renovation is treated differently from ongoing repairs during an established tenancy
• Bank statements or payment records confirming amounts paid and to whom

Our broader record keeping guide sets out what to retain across all categories of landlord expenditure, and our allowable expenses guide covers how different cost types are treated.

What If the Original Invoices Are a Single Lump Sum?

It’s common, particularly for older renovation work, to have only a single invoice covering a whole project without a breakdown between repair and capital elements. Where this happens, a reasonable, well-documented apportionment can be made — for example, based on quotes for comparable individual elements of the work, or a contractor’s recollection of the scope, clearly labelled as an estimate. This isn’t ideal, but it’s a workable and accepted approach where the original itemisation genuinely doesn’t exist.

How Renovation Costs Fit Into the Wider Disclosure

Renovation costs need to be allocated to the correct tax year — generally the year the cost was incurred, or in some cases spread differently depending on the nature of the work — and correctly categorised as repair or capital before they can be included in your Let Property Campaign calculation. Our guide on how many years you need to declare is a useful companion resource for understanding the overall disclosure period this fits within.

How Felix Accountants Can Help

Renovation costs are one of the areas we most commonly see get miscategorised in self-prepared disclosures — sometimes understating a genuine repair deduction, sometimes incorrectly claiming capital works against rental income. We review renovation spending line by line, apply the correct treatment, and help you build the record trail to support it, as part of our wider LPC disclosure guidance.

Frequently Asked Questions

Can I claim the cost of a new kitchen against my rental income?

Generally yes, if it’s a like-for-like replacement of an existing kitchen. If the work also involves structural changes, such as an extension or knocking through walls, that capital element isn’t deductible against rental income.

Are double glazing replacement windows a repair or a capital improvement?

HMRC has generally accepted replacing single glazing with double glazing as a repair, treating double glazing as the modern equivalent of the original, even though it’s technically an improvement.

Can I claim renovation costs incurred before my property was first let?

Generally no, if the property needed significant work to bring it up to a let-table standard before the rental business began — this is usually treated as a capital cost of acquisition rather than a revenue expense.

What if I don’t have itemised invoices for old renovation work?

A reasonable, documented apportionment between repair and capital elements can be used where original itemisation genuinely isn’t available, based on the best evidence available.

Do capital improvements ever reduce my tax bill?

Yes, but differently — capital improvement costs are generally added to the property’s cost base and reduce any Capital Gains Tax due when the property is eventually sold, rather than reducing rental income tax in the year the work was done.

Very few rental properties are let smoothly from 6 April to 5 April every single year. Tenants move out and there’s a void period before the next one moves in; a property is bought or sold partway through the year; a landlord moves in for a few months between tenancies. When you’re putting together a Let Property Campaign disclosure covering several tax years, working out exactly how much income and which expenses relate to each part-year period is one of the more fiddly calculations — but getting it right matters, since it directly affects how much tax is due for each year.

Why Part-Year Periods Come Up So Often in LPC Disclosures

Common reasons a property was only let for part of a tax year include:

• The property was purchased or sold partway through the tax year
• There was a void period between tenants, sometimes lasting several months
• The landlord lived in the property for part of the year before letting it out, or moved back in for a period
• The letting only began partway through the campaign’s relevant period, for example if the property was previously used differently

Each of these scenarios needs its own approach to correctly calculate the income and expenses that actually relate to the letting period, rather than the tax year as a whole.

Step 1: Establish the Exact Letting Dates

Before any calculation can begin, you need to pin down precisely when the letting period started and ended within each relevant tax year. This might come from tenancy agreements, a letting agent’s records, the completion date on a purchase or sale, or bank statements showing when rent first appeared. Where records are incomplete, a reasonable, clearly documented estimate is acceptable, provided the reasoning behind it is explained.

Step 2: Calculate Income for the Actual Letting Period Only

Only rent actually received (or due, if using the accruals basis) during the period the property was genuinely let should be included as rental income for that tax year. If a property was let from 1 October to 5 April in a particular tax year, only the rent relating to that six-month window counts as income for that year — not a full year’s worth of rent apportioned evenly, unless the actual rent received happens to align with that.

Step 3: Apportion Ongoing Costs Correctly

This is where part-year calculations get more technical. Some costs relate specifically to the letting activity and should only be claimed for the period the property was actually let or genuinely available to let; others are ongoing regardless of tenancy status and need a different treatment:

• Costs directly tied to the letting period: letting agent management fees, for example, generally only apply while a tenancy is active or the property is being actively marketed
• Costs that continue regardless of tenancy: mortgage interest, buildings insurance, and ground rent are often payable whether or not the property is currently tenanted, and can generally still be claimed for the full ownership period within the tax year, including reasonable void periods, as long as the property was genuinely held as part of a rental business rather than for personal use
• Costs relating to personal use periods: if the property was genuinely used as a personal residence for part of the year, expenses relating to that period generally can’t be claimed against rental income at all

Our detailed guides on property expenses and allowable expenses for property investors cover which costs fall into each category in more depth.

Void Periods: What Counts as “Still Let”?

A genuine void period — where the property is empty between tenants but still being actively marketed and available to let — is generally still treated as part of the rental business, meaning ongoing costs during that gap remain claimable. This is different from a period where the property was deliberately taken off the market, used personally, or left vacant with no active intention to re-let, which would generally break the continuity of the letting business for that portion of the year.

Worked Example

In this example, the full tax year’s ongoing costs would generally still be claimable, while rental income only reflects the two tenanted periods.

What If the Property Was Bought or Sold Partway Through the Year?

Where a property was purchased or sold during a tax year covered by the disclosure, only the period of actual ownership and letting is relevant — there’s no rental income or expense claim for the period before purchase or after sale. If the sale itself wasn’t reported separately, it’s also worth checking whether a Capital Gains Tax reporting obligation applies alongside the Let Property Campaign disclosure; our Capital Gains Tax guide covers this side of the picture.

Documenting Your Approach

Because part-year calculations involve a degree of judgement — particularly around whether a void period counts as ongoing letting activity — it’s important to document the reasoning behind each apportionment clearly. This protects the disclosure if HMRC has questions later, and shows a consistent, defensible methodology rather than figures that were simply estimated without explanation. Our record keeping guide sets out what’s worth retaining to support this.

How This Fits Into the Wider Look-Back Calculation

Part-year calculations need to be done separately for each tax year within your disclosure period, since the letting pattern often differs from year to year. Our guide on how many years you need to declare explains how the overall look-back period is determined, and each of those years will typically need its own careful income and expense calculation if the letting pattern wasn’t consistent throughout.

How Felix Accountants Can Help

Part-year and void-period calculations are one of the more common sources of error in self-prepared Let Property Campaign disclosures. We help landlords work through each relevant tax year methodically, correctly apportioning income and expenses, and documenting the approach so the disclosure holds up to scrutiny. See our guide to landlord accounting for the broader calculation framework this sits within.

Frequently Asked Questions

Do I need to claim expenses for the whole tax year if my property was empty for part of it?

Generally yes, for ongoing costs like mortgage interest and insurance, provided the property remained genuinely part of your rental business — for example, being actively marketed during a void period rather than taken off the market entirely.

How do I calculate rent for a property let for only part of a tax year?

Only the rent actually received or due during the genuine letting period counts as income for that tax year — it shouldn’t be averaged or apportioned evenly across the full year unless that happens to reflect the actual amounts received.

What if I can’t remember exactly when a tenancy started or ended?

A reasonable, documented estimate is acceptable where exact dates can’t be confirmed, based on the best available evidence such as bank statements or correspondence with a letting agent.

Does a void period break my entitlement to claim mortgage interest relief?

Not usually, as long as the property remained genuinely available and marketed for letting during that period, rather than being used personally or withdrawn from the rental market.

Do I need to do this calculation separately for every tax year in my disclosure?

Yes, since the letting pattern often varies year to year. Each tax year within your look-back period generally needs its own income and expense calculation reflecting what actually happened that year.

Selling e-books, online courses, software subscriptions or other digital products feels straightforward, right up until you realise VAT doesn’t always work the way it does for physical goods or in-person services. Digital services follow their own “place of supply” rules, meaning the VAT that applies can depend on where your customer is, not where your business is based. Here’s what UK small businesses selling digital products and services online need to understand.

What Counts as a “Digital Service” for VAT Purposes?

HMRC defines digital services (also called “electronically supplied services”) as services delivered over the internet or an electronic network with little or no human intervention, and largely automated. Common examples include e-books and downloadable content, streaming media, online courses and webinars delivered automatically, software as a service (SaaS), apps, software downloads and updates, and website templates or digital design assets. It’s worth noting this doesn’t cover everything sold online — a live, one-to-one consulting call booked through a website isn’t a digital service in this sense, since it involves genuine human interaction, even though it was arranged digitally.

Selling to UK Customers

If your customers are based in the UK, standard UK VAT rules apply in the normal way. Once your VAT-taxable turnover exceeds the registration threshold of £90,000 in any rolling 12-month period, you must register for VAT and charge the standard rate — currently 20% — on most digital sales to UK customers, with a small number of exceptions such as certain electronically supplied publications, which can qualify for a zero rate.

Selling to Business Customers Abroad (B2B)

For sales to VAT-registered businesses outside the UK, the general rule is that the place of supply is where the customer is established, not where you are. In practice, this usually means no UK VAT is charged on the sale, and the overseas business customer accounts for VAT themselves in their own country under the “reverse charge” mechanism. This applies to most genuine B2B digital service sales, such as a UK SaaS provider invoicing a VAT-registered company in another country.

Selling to Individual Consumers Abroad (B2C)

This is where digital services diverge most from standard VAT treatment. For sales of digital services to private consumers (not VAT-registered businesses), the place of supply is generally where the consumer is located, not where your business is based. This means, in principle, you may need to charge VAT at the consumer’s local rate and account for it in their country, rather than applying UK VAT.

For consumers in the EU specifically, most UK businesses use the Non-Union One Stop Shop (OSS) scheme to manage this, rather than registering for VAT separately in every EU country where they have customers. Registering once through OSS allows a single quarterly return covering all EU consumer digital sales, with the relevant tax authority distributing the VAT to the correct countries.

Determining Where Your Customer Actually Is

Because the applicable VAT depends on the customer’s location, you need reliable evidence of where each customer belongs. HMRC and equivalent EU guidance generally expect at least two pieces of non-conflicting evidence, which might include the customer’s billing address, the IP address used to access the service, the country code of their payment card or bank details, or their SIM card country code for mobile purchases. This evidence should be retained as part of your VAT records, since HMRC and other tax authorities expect it to support the VAT treatment applied to each sale.

What About Digital Platforms and Marketplaces?

If you sell digital products through a third-party platform or marketplace, the VAT obligation can sometimes shift to the platform operator rather than sitting with you directly, depending on the specific arrangement and who is legally identified as the supplier in the contractual terms, invoices and receipts. This is worth clarifying with any platform you sell through, since it directly affects who’s responsible for charging and accounting for VAT on each sale.

Common Mistakes UK Digital Sellers Make

• Charging UK VAT on B2C sales to EU or international consumers, rather than the correct local rate
• Not registering for the appropriate scheme (such as OSS) once selling meaningfully to EU consumers
• Treating a service with genuine human interaction as automatically exempt from digital service rules, when the level of automation actually matters
• Failing to retain the customer-location evidence needed to support the VAT treatment applied
• Assuming VAT MOSS still applies post-Brexit — it doesn’t for UK businesses, which now generally use the non-Union OSS scheme instead

Digital Services and Making Tax Digital

Separately from the place-of-supply rules, VAT-registered digital businesses are required to keep digital records and file VAT returns through Making Tax Digital-compatible software, the same as any other VAT-registered business. Given that digital sellers are often already using cloud-based tools for their business, this tends to be a relatively straightforward requirement to meet compared to some other sectors.

How This Differs From Selling Physical Goods Online

If your online business sells physical goods rather than (or alongside) digital services, different VAT rules apply, generally based on where the goods are shipped from and to, rather than the digital place-of-supply rules described here. Our guide on the latest tax rules for online sellers covers the broader landscape for e-commerce businesses selling both physical and digital products.

How Felix Accountants Can Help

We help small businesses selling digital products and services work out exactly where VAT applies, get registered for the right schemes (whether that’s standard UK VAT, OSS for EU consumers, or both), and keep the evidence trail HMRC expects. See our small business tax services for how we support online sellers more broadly.

Frequently Asked Questions

Do I need to charge VAT on digital products sold to consumers in the EU?

Generally yes, at the consumer’s local VAT rate rather than the UK rate, since the place of supply for B2C digital services is where the consumer is located. Most UK businesses manage this through the Non-Union OSS scheme.

Do I charge VAT on B2B digital service sales to overseas businesses?

Usually not UK VAT. For B2B sales, the place of supply is generally where the business customer is established, and the reverse charge mechanism typically applies, meaning the customer accounts for VAT in their own country.

What’s the VAT registration threshold for a UK digital business?

The standard UK VAT registration threshold applies — currently £90,000 of VAT-taxable turnover in any rolling 12-month period — the same threshold that applies to any other type of UK business.

Is an online course automatically treated as a digital service for VAT?

Only if it’s largely automated with little or no human intervention. A live, interactive course delivered by an instructor in real time is generally treated differently from a fully automated, pre-recorded course.

Can I still use VAT MOSS as a UK business?

No. VAT MOSS ended for UK businesses after Brexit. UK sellers generally use the Non-Union One Stop Shop (OSS) scheme instead for EU consumer digital sales.

A trading loss is never welcome news, but it isn’t purely bad news for your Corporation Tax position either. UK companies have several options for using a trading loss to reduce tax, whether that’s offsetting it against profits from the same period, carrying it back to a profitable prior year for a refund, or carrying it forward to reduce tax in future years. Understanding which options apply — and which is most valuable for your specific situation — can make a real difference to your company’s cash position.

What Counts as a Trading Loss?

A trading loss arises when your company’s allowable expenses exceed its taxable income from its main trading activity within an accounting period. It’s calculated in broadly the same way as profit, just with the result coming out negative. It’s worth noting that different types of loss — trading losses, capital losses, and non-trade loan relationship losses — are treated differently, so the options below relate specifically to trading losses from your company’s core business activity.

Option 1: Offset Against Profits in the Same Accounting Period

If your company has other income in the same accounting period — for example, rental income, investment income, or a capital gain — a trading loss can generally be set against that other income first, reducing your overall Corporation Tax bill for the period in which the loss arose.

Option 2: Carry the Loss Back

Under general rules, a trading loss can be carried back and set against profits from the previous accounting period. If your company made a substantial profit last year and a loss this year, carrying the loss back can generate a genuine cash refund of tax already paid — this is often the most immediately valuable option where cash flow is a priority, since it converts the loss into money back in the business relatively quickly, rather than a benefit that only helps once future profits materialise.

Option 3: Carry the Loss Forward

Where a loss can’t be fully used against current or prior-year profits, the remainder can be carried forward indefinitely and set against future profits, as long as the company continues to trade. This is the most commonly used relief for ongoing businesses that expect to return to profitability, and it doesn’t have an expiry date — a carried-forward loss remains available to use against future profits for as long as the company continues trading.

For accounting periods starting on or after 1 April 2017, losses carried forward can generally be set against total profits of the company (not just profits from the same trade), giving more flexibility than losses carried forward from earlier periods, which were typically restricted to profits from the same trade only.

Option 4: Terminal Loss Relief for Companies That Have Stopped Trading

If a company permanently ceases trading and makes a loss in its final 12 months, special “terminal loss” rules allow that loss to be carried back up to three years, rather than the standard one year, against profits from the same trade, applied against the most recent year first and working backwards. This can be particularly valuable for directors winding up a business, since it may unlock refunds from several years of prior Corporation Tax payments.

A Restriction Worth Knowing About: The £5 Million Threshold

For most small and medium-sized companies, this won’t apply, but it’s worth being aware of: where a company or group’s profits exceed £5 million in an accounting period, only 50% of profits above that threshold can be sheltered by carried-forward losses in that period. Below the £5 million threshold, companies can generally use all their available carried-forward losses without this restriction.

Group Relief: Losses Across Related Companies

Where a company is part of a group structure with at least 75% common ownership, trading losses can potentially be surrendered between group companies within the same accounting period, allowing a loss in one company to reduce the tax bill of a profitable related company. This is a more complex area, particularly for property investors using multiple special purpose vehicles, and it’s worth reviewing alongside your wider SPV structure if your group includes several companies.

How to Make a Claim

Loss relief claims are generally made as part of your Company Tax Return (CT600), using the specific loss-relief boxes for the accounting period in question. Where a loss is being carried back to an earlier period, you may need to amend that earlier return or write to HMRC separately, depending on how the return was originally filed and whether it’s still within the amendment window.

Choosing Between Carrying Back and Carrying Forward

Where both options are genuinely available, the right choice depends on your priorities:

• Carry back if immediate cash flow matters more than long-term tax planning, since it generates a relatively quick refund
• Carry forward if you expect meaningfully higher profits in future years and would rather shelter tax at a point when the company can more easily absorb the cash flow impact of paying tax now

These aren’t mutually exclusive across different loss amounts — some companies use a combination, carrying back what they can and carrying forward the remainder.

How Felix Accountants Can Help

We help company directors model out the different loss relief options, calculate the actual cash benefit of each, and prepare the correct claims on the CT600 or via a formal letter to HMRC where needed. See our wider business tax services for how loss relief fits into broader Corporation Tax planning, and our guide on tax-efficient business sale exit planning if losses are part of a wider decision about the company’s future.

Frequently Asked Questions

How long can a company carry forward a trading loss?

Indefinitely, as long as the company continues to trade. There’s no expiry date on carried-forward trading losses.

Can I choose whether to carry a loss back or forward?

Generally yes, where both options are genuinely available, though the specific claim process and time limits differ, so it’s worth deciding based on which gives the better financial outcome for your company.

Do carried-forward losses restrict which profits they can be used against?

For losses arising in accounting periods starting on or after 1 April 2017, carried-forward losses can generally be set against the company’s total profits, not just profits from the same trade.

What happens to trading losses if my company stops trading?

If the company permanently ceases trading, a loss made in its final 12 months can be carried back up to three years under special terminal loss relief rules, rather than the standard one-year carry-back.

Is there a limit on how much loss a large company can use?

For companies or groups with profits exceeding £5 million in an accounting period, only 50% of profits above that threshold can be sheltered by carried-forward losses. Most small and medium-sized companies aren’t affected by this restriction.

Realising you’ve under reported income on a Self Assessment return you’ve already filed is unsettling, but it’s also a genuinely common and fixable situation. Whether it’s a missed freelance payment, undeclared rental income, or a figure that was simply entered incorrectly, HMRC has clear, well-established routes for correcting the position — and the process differs depending on how long ago the return was filed.

Why Correcting It Promptly Matters

HMRC generally expects taxpayers to correct errors as soon as they become aware of them, and doing so promptly and voluntarily is treated far more favourably than waiting for HMRC to identify the discrepancy independently. Penalties for inaccuracies in tax returns are based on the behaviour behind the error — genuine mistakes made with reasonable care are treated far more leniently than careless errors, which in turn are treated more leniently than deliberate under-reporting. Acting quickly, before HMRC opens an enquiry, keeps your correction in the more favourable category.

Step 1: Confirm Which Route Applies to You

The correction process depends on how long ago the affected return was filed:

• Within 12 months of the filing deadline: you can amend the return directly, either online or on paper
• More than 12 months after the filing deadline: you’ll generally need to write to HMRC to request the correction, and may need to claim “over payment relief” if the correction would reduce your tax bill, or simply notify HMRC of additional tax owed if it increases it

Correcting a Return Within the 12-Month Window

If you filed online, you can amend your return directly through your HMRC online account, once 72 hours have passed since the original submission. Sign in, navigate to your Self Assessment details, select the relevant tax year, and update the figures before resubmitting. HMRC will recalculate your bill and reflect any additional tax owed, or process a refund if the correction reduces your liability.

If you filed a paper return, you’ll need to download a new return form for the relevant year, clearly mark it as an amendment, and post it to HMRC’s Self Assessment address, along with your Unique Taxpayer Reference and a clear explanation of what’s being corrected.

Correcting a Return Outside the 12-Month Window

If more than 12 months have passed since the original filing deadline, you can’t amend the return through the normal online process. Instead, you’ll need to write to HMRC directly, setting out:

• The tax year the correction relates to
• Details of the error and the correct figures
• The reason for the correction
• A signed declaration confirming the information provided is correct and complete to the best of your knowledge

Where the correction would mean you’d overpaid tax, this is generally handled as a formal claim for “over payment relief,” which can be made up to four years from the end of the relevant tax year. Where the correction increases what you owe, HMRC will issue a revised calculation and expect payment, generally with interest accruing from the original due date.

What If Multiple Years Are Affected?

If the under reported income spans several tax years — for example, a source of income that was missed consistently, such as rental income or a side business — each year technically needs its own correction, following whichever route applies to that specific year. Where the under-reporting relates to rental income specifically, this is exactly the situation HMRC’s Let Property Campaign is designed for, offering a more structured, single process for correcting several years of rental income at once, generally with more favourable penalty treatment than a series of standalone corrections.

Will You Face a Penalty?

Not necessarily. If the correction is voluntary — made before HMRC has contacted you about the discrepancy — and the underlying error was a genuine mistake made with reasonable care, penalties may be reduced significantly or not applied at all. Our guide to HMRC compliance covers how penalty behaviour categories work in more detail, and our penalty calculator can give you a sense of the range involved based on your specific circumstances. The comparison between prompted and unprompted disclosures is also directly relevant here — correcting the error yourself, before any HMRC contact, keeps the disclosure classed as unprompted.

What If HMRC Has Already Contacted You?

If you’ve received a letter or nudge letter from HMRC before you’ve made the correction yourself, the disclosure becomes “prompted” rather than “unprompted,” which generally results in a higher penalty percentage. It’s still almost always better to respond constructively and correct the position than to ignore the letter, delay, or hope the issue resolves itself.

Interest on Underpaid Tax

Regardless of which route applies, interest accrues on any underpaid tax from the original due date until it’s paid, calculated at HMRC’s standard late payment interest rate. This is separate from any penalty and applies even where the under-reporting was a genuine, non-deliberate mistake, so it’s worth correcting and paying as soon as possible to minimise the interest charge.

How Felix Accountants Can Help

We help clients correct under reported income across single years or multiple tax years, whether that’s a straightforward in-year amendment or a more involved correction spanning several years and requiring a formal letter to HMRC. Where the under-reporting relates specifically to rental income, we’ll advise on whether the Let Property Campaign or a standard correction is the more appropriate route for your situation.

Frequently Asked Questions

How far back can I amend a Self Assessment tax return?

You can amend a return directly within 12 months of the original filing deadline. Beyond that, you can still request a correction by writing to HMRC, and claim over payment relief for up to four years from the end of the relevant tax year if the correction reduces your bill.

Will I be fined for correcting an honest mistake?

Not necessarily. Voluntary corrections made with reasonable care, before HMRC contacts you, are generally treated more leniently, and penalties may be reduced significantly or not applied at all.

Do I need to wait before amending an online return?

Yes. HMRC requires a 72-hour wait after the original submission before you can make changes through your online account.

What happens if the correction means I’m owed a refund?

If the correction is made within 12 months of the filing deadline, HMRC processes the refund as part of the standard amendment. Outside that window, you’ll need to make a formal over payment relief claim.

Is there a specific process for correcting undeclared rental income specifically?

Yes. Rental income spanning multiple years is often better handled through the Let Property Campaign, HMRC’s structured voluntary disclosure route for landlords, rather than a series of standalone return corrections.